If, like most real estate agents, you’re self-employed, you’re supposed to make your second quarterly estimated tax payment for 2012 on June 15.
So soon? Didn’t you just make a quarterly payment last April 15? Yes, you did. But for some reason the IRS calculates quarters differently from the rest of us. It wants your second "quarterly" payment on June 15. Your third payment is due Sept. 17 and the fourth due on Jan. 15, 2013.
How much are you supposed to pay?
The IRS would like the four estimated tax payments you make each year to add up to your tax liability for the year — that is, your total income tax and self-employment tax (Social Security and Medicare tax) combined.
However, paying the exact right amount can be difficult if your income varies substantially from year to year (as it does for many real estate professionals). If you don’t pay enough estimated tax, the IRS will impose a penalty.
Fortunately, there is a way to avoid having to estimate how much you’ll make this year. No matter what your income for the current year turns out to be, you won’t have to pay any penalties if the estimated tax you pay is at least the smaller of:
- 90 percent of your total tax due for the current year, or
- 100 percent of the tax you paid the previous year, or 110 percent if you’re a high-income taxpayer (those with adjusted gross incomes of more than $150,000 or $75,000 for married couples filing separate returns).
What if you don’t want to pay now?
However, just because the IRS says you’re supposed to make an estimated tax payment on June 15 doesn’t mean you have to. Unlike an employee, no taxes are withheld from your pay when you’re self-employed. You are perfectly free to pay less than you owe or even none at all. You don’t have to ask the IRS’s permission to do this or file any forms. Just reduce or don’t make your payment.
Of course, not paying your estimated tax on time comes at a price: The IRS imposes an interest penalty if you underpay your estimated taxes. The interest is based on the difference between the amount you should have paid in for each installment and the amount you actually paid for as long as the underpayment remains outstanding.
The interest rate is set by the IRS each year. Currently, it’s only about 3 percent. This means that it would be cheaper to pay the penalty to the IRS than to borrow money to pay your estimated taxes on time.
Because the penalty is so low, many self-employed people decide to pay the penalty at the end of the tax year rather than take money out of their businesses during the year to pay estimated taxes.
If you do this, though, make sure you pay all the taxes you owe for the year by April 15 of the following year. If you don’t, the IRS will tack on additional interest and penalties. The IRS usually adds a penalty of 1/2 percent per month to a tax bill that’s not paid when due. This amounts to 6 percent per year. This penalty is added to the 3 percent interest charge, so the total penalty would be 9 percent or more if you don’t pay all your tax due on April 15.